The key force behind the resurgence and sustained momentum of commercial real estate (CRE) has been new-age accessible instruments like fractional ownership and REITs, writes Shiv Parekh, Founder, hBits.
As India emerges from the clutches of the pandemic and stabilizes itself amid economic concerns around the Russian invasion of Ukraine, the commercial real estate sector has received a major boost fuelled by a host of factors. Commercial real estate (CRE) has recorded impressive growth in 2022, accelerating the momentum set in 2021, and looks poised to capitalize further on new emerging opportunities in 2023.
A major driving force behind the resurgence and sustained momentum of CRE has been new-age accessible instruments like fractional ownership and REITs. These instruments have enabled regular investors to a share of the booming CRE pie and expanded the overall investment base.
Below are some of the expected trends for 2023:
Performance
As demand continues to soar steadily, the CRE sector is expected to grow to a market value of $1 trillion, up from $200 billion in 2021, and is expected to contribute to 18-20 percent of the country’s GDP by 2030, as per reports. It is expected that 2023 will see the sector spreading its wings as sectors like retail, hospitality, warehousing, and data centers were spurred, by soaring demand and investments.
Warehousing & Data Centres
A majority of the demand has been in Grade A warehousing spaces. The growth is illustrated in the fact that the average size of a Grade A warehouse in India has doubled from 80,000 square feet in 2018 to 1,60,000 square feet in 2022.
Overall stock in the first half of 2022 stood at 307 million sq ft, compared to 170 million sq ft in 2018, and is expected to reach ~500 million sq ft by 2025, at a CAGR of 28 percent year on year.
According to industry experts, the warehousing and logistics sector has been the largest beneficiary during the COVID-19 pandemic and the share of total real estate investment in the sector has increased from 2 percent in 2020 to 20 percent in 2021. Warehouse volume in India has grown nearly three times from 2.4 million cubic feet in 2016 to 6.4 cubic feet in 2021.
Return of Office Spaces
There will be a heartening trend in 2023 which will lead to the return and consolidation of demand for office spaces. Premium office spaces have attracted investors; thanks to a sharp uptick in demand by IT companies, software, and BFSI firms. Recording a 66 percent rise, office space leasing has witnessed an absorption of 42 million sq. ft. Moreover, the growth of co-working spaces, reverse migration back to cities, and MNCs making India their new APAC bases have contributed significantly to the numbers in 2022.
Fractional Ownership
Accessible options like fractional ownership of commercial real estate (CRE) have helped investors not only preserve but grow their capital amount. Such investments offer 8-10 percent rental yield per annum and investors also get capital appreciation which ranges between 5-10 percent, so the investor earns 13-20 percent IRR for the time they are invested in.
The rental yield of a commercial property (8-10%) is higher than the yield from a residential property (2-4%). So, an investment of 25 lahks in fractional ownership has the potential to deliver Rs 16,500 to 20,000 monthly in rental income alone. This leads to a steady expansion of wealth and improved monthly liquidity.
These kinds of investments are Ideal for investors looking for a fixed monthly income: as these properties are able to deliver an 8-10% rental yield, which is best in class in the fixed income category. Along with that, these properties also get capital appreciation, so the investors don’t have to worry about capital erosion while consuming the rent from the portfolio. Also, with the escalation clauses in the rental agreements, the rent they receive also Increases at regular intervals, more or less with Inflation. So, they get inflation-protected returns along with being able to take care of their monthly expenses.
These kinds of investments are also ideal for Investors looking at alternative asset classes to diversify their portfolio without dilution of returns.
Future Prospects
As per projections, the commercial real estate market in India is expected to grow at a CAGR of approximately 13 percent during the forecast period 2022-2027. Moreover, NRIs have invested over $13.1 billion in the Indian real estate market in the last fiscal and the investment is expected to grow further in 2023.
Way Forward in 2023
This year is expected to carry forward the momentum generated in 2022 and see more demand in areas like warehousing, data centers, organized retail, and Grade-A office spaces.
Moreover, at a time when the economy is still fragile and growth projections moderate, one needs to stay cautious with one’s investments. Smart investment options like Fractional Ownership of CRE allow investors to preserve as well as grow their capital. These instruments ensure stable returns that not only beat inflation but also enable investors to save better.
— The author, Shiv Parekh, is the Founder of hBits, a fractional real estate platform. He has also worked at top financial organizations in the US including Citibank, Stanford Management Company (Stanford University’s endowment that manages over $20 billion), and Karbone (renewable energy investment bank). He has also excelled in commercial real estate development in India.
(Edited by: C H Unnikrishnan)
Source: cnbc